Confidence in Euro-area economy drops on supply squeeze, virus

Confidence in the euro-area economy slipped for the first time this year, suggesting that supply disruptions and the resurgent pandemic risk damping the recovery.

Sentiment eased in services, industry and among consumers, with a European Commission gauge falling to 117.5 in August from an all-time high the previous month. At the same time, an increase in selling-price expectations suggests inflation pressures are building across the bloc.

The region’s economic outlook has clouded in recent weeks. A shortage of raw materials, quickly climbing costs and transportation bottlenecks are disrupting manufacturing, while quickly rising coronavirus infections threaten new restrictions on services, which took over as a growth driver this month.  

Industry order books deteriorated in August, according to the survey, and services managers were less positive on future demand. Consumers expressed concerns about the general economic situation and were less willing to make major purchases.

The Bundesbank, Germany’s central bank, has already warned that economic growth this year may be somewhat lower than the 3.7% it had forecast in June, and companies are worried that the recovery will stall before it really took off. 

Volkswagen AG restarted its Wolfsburg plant, the world’s biggest employing some 60,000 people, with only one shift this month. Audi, the group’s biggest profit contributor, was forced to extend its summer break by one week at two factories in Germany amid “volatile and tense” semiconductor supply.

The European Central Bank is optimistic that its projections will hold after tourism-reliant economies such as Italy and Spain saw strong rebounds in the second quarter. Chief economist Philip Lane said in a recent interview the region is “broadly not too far away” from the 4.6% expansion it currently predicts for the year.